Chinese Yuan Responds to U.S.-China Trade Fears

Stocks dropped sharply on Thursday after reports surfaced that President Trump would not be meeting Chinese President Xi Jinping before the March deadline when the U.S.-China trade war “ceasefire” is scheduled to end. Back in early December, Trump and Xi agreed to put their ongoing trade conflicts on hold and refrain from imposing additional tariffs on each other. As the March deadline looms on the horizon, a meeting between the two presidents would be necessary to avert escalation of the brewing trade war. In the absence of such talks, more tariffs on Chinese products entering the U.S. will likely go into effect. As a result of the newest developments, the Chinese yuan currency has responded to renewed U.S.-China trade fears.

Chinese Yuan and U.S.-China Trade

The Chinese currency, or the yuan, has recently been a solid barometer of the status of U.S.-China trade negotiations. More specifically, it’s the movement of the yuan against the dollar, which is measured by the USD/CNH (or USD/CNY) currency pair. As the chart above shows, when Trump and Xi announced that 90-day trade war ceasefire in early December, USD/CNH made the biggest two-day decline since 2005. This simply meant that the yuan appreciated substantially against the dollar on the news that tensions had begun to cool. Subsequent bouts of optimism about the prospects of a U.S.-China trade deal since then helped further push down the currency pair. Now that those 90 days may potentially run their course without a trade deal on the table, USD/CNH was on the rise on Thursday. This means that the yuan declined against the dollar on the hint of more trade troubles.

The Technicals

From a technical perspective, USD/CNH fell below its 200-day moving average last week. But it quickly recovered back above that key moving average and currently appears poised to rise further. Of course, this will depend in large part on how trade war prospects develop in the coming days and weeks. In the event that a full-blown trade war can be averted or delayed before the March ceasefire deadline, USD/CNH is likely to drop back below its 200-day moving average and continue its declining trend from November. Any failure to resolve this conflict before March, though, could boost the currency pair back up towards the 6.90 level.

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A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart